What is driving the dollar-yen exchange rate appears to be changing. This second chart shows the correlation between the percentage change in the dollar-yen and the percentage change in the S&P 500. On this Bloomberg chart, we show the rolling 60-day correlation since the start of 2015.

The Yen, JPY,  Three, Charts, Currency Analysis, fx trader, forex yen and S&P 500 chart 2Chart 2

In Q2 15, the correlation was negative, but after that period had ended, the correlation reached 0.90 in Q3 2015.  It fluctuated, but as recently as the beginning of the Q3 it was near 0.60. It has fallen to near zero now. The weakening of the correlation between the yen and the S&P 500 suggests that the yen's so-called safe haven status has weakened.

The third chart here suggests another potential driver of the dollar-yen exchange rate. This Bloomberg chart depicts the two-year interest rate differential between the US and Japan over the last several months. The US 2-year yield is up 21 bp over the past three months to stand a little above 80 bp. Over the same period, the Japan's 2-year yield has risen 4.5 bp. The spread is near 109 bp today. It has matched the late-July high.

The Yen, JPY,  Three, Charts, Currency Analysis, fx trader, forex yen 2-yr.chart 3Chart 3

Usually, the long-end differentials more important for the dollar-yen rate. The spread has been flattish for two months. It last poked through 200 bp in April, and since then has been trending lower. It reached a low in early September near 155 bp. It is currently a little above 170 bp. On September 20 it was at 175 bp. 

Marc Chandler‚Äč
Global head of currency strategy at BBH
Brown Brothers Harriman